Emerging markets: Best of a bad bunch.
    Category: Smart Investing 2016 By : Stuart Allsopp Read : 660 Date : Monday, June 20, 2016 - 03:15:15

    Due in large part to aggressive central bank actions to raise asset prices over recent years, equity and bond prices have risen to all-time highs, and in some cases record valuations. Property markets have also experienced similar price moves and affordability is stretched in most developed markets, and many emerging economies as excessively low interest rates have encouraged speculative demand. Industrial and agricultural commodity prices are historically cheap, but tend to be poor long-term investments. Precious metals prices should hold their own, but in real terms are unlikely to generate strong returns. Emerging market assets appear to be the only game in town for the long term.

    Real Estate: Rate Mean Reversion Could Be A Killer

    Record low mortgage rates have made property investing a one-way bet since the global financial crisis. Property prices have become detached from incomes in many of the world’s developed markets and rental yields have been squeezed to the point where continued lofty prices will require mortgage rates to remain at record lows over the long term. Hong Kong stands out as being the most expensive, as the major recipient of mainland Chinese capital, but Australia, New Zealand, Singapore and the U.K., all rank as “extremely unaffordable.” Major cities in the U.S. and Canada are also ranked in this category. For property prices to rise faster than inflation in most of these markets, interest rates will have to remain at record lows, and economic activity and wages will have to recover so that affordability can improve, which seems an unlikely prospect.

    Bonds: Return Free Risk

    Fixed income in developed markets has perhaps been the best performing asset in the world over the past decade on a volatility-adjusted basis, with yields heading lower with very little risk thanks to central bank purchases. However, in most developed markets, 10-year bond yields are now below 10-year inflation expectations, meaning that investors are willingly accepting negative real rates, and in some case are accepting negative nominal rates. With the exception of the U.S., Australia and New Zealand, fixed income investors in developed markets are highly likely to lose money in real terms over the long term, and in many cases will lose money in nominal terms.

    Commodities: Bounce Potential But Long-Term Headwinds

    Commodities have fallen considerably from their 2011 peaks, to the point where supply and demand dynamics are modestly favorable for prices over a multi-year horizon. For this year and next, we believe commodities should outperform global equities. That said, slower growth in China will prevent significant price gains. Commodities have been a poor inflation hedge over recent decades in part due to this and will likely continue to be so over the next decade.

    For gold and silver, we expect these metals to rise in coming years, holding their own in inflation-adjusted terms. However, the lack of yield and the significant outperformance we have already seen relative to broad commodity indices suggests a major bull market is unlikely. With the ratio of gold to silver considerably higher than it’s long-term average at an elevated 74x, we prefer silver over gold for the long term.